How to make P2P payments pay for banks

CCG Catalyst's Paul Schaus argues that there are more ways to monetize P2P payments than fees.

By offering free person-to-person payments, Venmo was able to gain an early edge, and set the customer expectation for free P2P transactions. Since banks have banded together through the Zelle network to take on Venmo in P2P payments, the question of how to monetize P2P transactions has concerned the industry.

Banks gain a significant share of their revenue from transaction fees. Naturally they wonder how to monetize a service that consumers have been receiving for free. Charging customers transaction fees could simply push them to Venmo. However, banks have a wide variety of other opportunities—both in the long- and short-terms—to monetize P2P payments.

The ultimate solution may not resemble traditional revenue streams at all.

Short-term solutions

In the short-term, banks can open up P2P payments networks to new use cases and customer segments that are more likely to generate fee revenue.

Venmo itself is taking this path, going beyond people paying each other. Its parent company, PayPal, has long sought to monetize the service’s popularity with young consumers by getting them to pay merchants with their Venmo wallets, allowing PayPal to collect transaction processing fees from the merchants.

Zelle has caught on quickly—the network now counts more than 100 member banks and moved more than $25 billion in transactions in the first quarter of 2018—and banks should similarly explore monetization opportunities beyond consumer P2P transactions.

That could include allowing consumers to pay merchants with Zelle, or it could involve opening up Zelle to commercial and small business clients. These customer segments are more likely to accept fees for Zelle’s fast payments capabilities when they need to pay partners and suppliers.

Longer-term solutions

However, the larger long-term monetization opportunities in P2P payments won’t be seen in fee revenue.

Instead, it will be in the data—and the services enabled by that data—that banks can harvest from these digital transactions.

As more and more transactions become digital, the data that banks collect from those transactions will become increasingly critical to their business. Zelle is reportedly eating into transactions traditionally preformed with checks and cash, such as paying for rent and services like lawn care and babysitters. Conducting these transactions through digital channels will give banks greater data and visibility into customers’ spending habits.

That data will help them better understand customers’ financial habits, and offer personalized recommendations and services. Such data can be used to create personalized product recommendations for retail consumers, as well as offer them personalized financial advice on spending habits and specific purchases.

Eventually, the real-time and mobile nature of digital P2P payments services could help enable instant personalized advice on purchasing decisions via mobile. Additionally, opening up P2P payments services to commercial and small business clients could similarly help deliver product recommendations and financial advice to these clients based on greater visibility into their finances and cash flow.

Banks must shift towards developing digital business models built off data. They will also need to invest in the data management and analytics capabilities to drive revenue from transaction data. The type of additional data-based services banks can offer will depend on what types of customers are using P2P payments, and what kind of value-added services those segments are interested in.

That means banks will have to define the needs and habits of those customer segments they are targeting with P2P payments and additional services, and create plans for building the services and underlying capabilities necessary to meet those needs.

If banks fail to make this digital shift, they will cede an important competitive edge to fintech players. These disruptors are offering transaction services at little or no cost precisely to build customer engagement and harvest data they can then use to sell other products and services.

That data could allow these digitally native players to build a better understanding of banks’ customers than banks themselves have, putting banks’ customer relationships at risk.

To avoid that fate, banks will have to compete on low-cost digital transactions, with an eye towards monetizing the data from those transactions in the future.